Arndt, Inc. reported pretax income of $195,000 for the year ended December 31, 2

Question

Arndt, Inc. reported pretax income of $195,000 for the year ended December 31, 2013. Selected tax-related information is listed below: (a.) Arndt received $90,000 in cash for advance subscription sales, while only $45,000 of revenue was recorded on the income statement. There was no advance subscriptions recorded in prior years. (b.) Expenses included $15,000 in insurance premiums for life insurance on key executives. This expense is not deductible for tax purposes. (c.) On January 1, 2013, the company recorded a $30,000 prepaid advertising expense. The advertising services will be expensed equally over 3 years (2013 – 2015). (d.) During 2013, the company incurred wage expenses of $50,000 and paid wages of $75,000. At the beginning of the year, wages payable had a $30,000 balance. (e.) In 2013, the company earned $20,000 interest on non-taxable municipal bonds. At December 31, 2012, the deferred tax asset balance was $10,000, and the deferred tax liability was $12,000. The enacted tax rate is 30%. 1. Determine whether the difference creates a temporary/permanent difference. 2. Determine whether any temporary differences create a DTA/DTL. 3. Prepare the tax-related journal entry for 2013. 4. Calculate the effective tax rate for 2013.

Explanation / Answer

Income as per tax = 195000+45000+15000+20000-2000-75000=198000

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